Re­form of ODI seen as nec­es­sary to help ward off po­ten­tial trou­ble

China Daily (Hong Kong) - - BUSINESS - By ZHONG NAN zhong­nan@chi­nadaily.com.cn

Chi­nese banks will no longer be the fi­nan­cial source for do­mes­tic com­pa­nies to buy sports clubs, ho­tels, en­ter­tain­ment and real es­tate busi­nesses abroad — as the coun­try re­forms its out­bound di­rect in­vest­ment pol­icy to ward off risks — ac­cord­ing to an­a­lysts.

Their com­ments came af­ter the govern­ment re­ported that Chi­nese com­pa­nies in­vested more than 15 bil­lion yuan ($2.27 bil­lion) in buy­ing for­eign sport clubs, mainly in Europe, since 2014. That’s even though many foot­ball clubs had con­sec­u­tive an­nual losses be­fore they ac­quired them.

Cen­tral govern­ment branches, such as the State Ad­min­is­tra­tion of For­eign Ex­change, be­gan to take mea­sures to pre­vent un­wise and even il­le­gal over­seas in­vest­ments by both State-owned and pri­vate com­pa­nies in the fourth quar­ter of 2016. All ODI ac­tiv­i­ties in­volv­ing amounts over $50 mil­lion must now be ap­proved by pol­icy mak­ers.

“It is fine for com­pa­nies to buy over­seas busi­nesses us­ing their own cash. How­ever, many com­pa­nies are us­ing bank loans to in­vest in for­eign coun­tries and many of them have high debt ra­tios and weak earn­ings abil­i­ties,” said Yin Zhongli, a re­searcher at the In­sti­tute of Fi­nance and Bank­ing at the Chi­nese Academy of So­cial Sciences.

Yin said they also bor­rowed money from do­mes­tic fi­nan- cial in­sti­tu­tions to con­duct ODI ac­tiv­i­ties. If these failed to se­cure prof­its, Yin added, the losses would add po­ten­tial risk to do­mes­tic mar­kets.

Chi­nese in­vestors have been keen to buy Euro­pean foot­ball clubs over the past few years. The out­right pur­chase of AC Mi­lan, by a Chi­nese con­sor­tium for 520 mil­lion eu­ros ($606 mil­lion) in April, was among the high­est pro­file deals yet.

Chi­nese re­tailer Sun­ing Holdings also bought a ma­jor­ity stake in In­ter Mi­lan for 270 mil­lion eu­ros ($316.9 mil­lion) last year, even though the Ital­ian club had lost a to­tal of 275.9 mil­lion eu­ros over the past five years.

Some ODI ac­tiv­i­ties in non­real eco­nomic busi­ness could lead to ir­ra­tional in­vest­ments and il­le­gal ac­tiv­i­ties.”

Other pri­vate giants — in­clud­ing An­bang In­sur­ance Group, Dalian Wanda Group and Fo­sun Group — have all been big spenders in ac­quir­ing for­eign real es­tate, ho­tels, film com­pa­nies and sport clubs since 2015.

“The govern­ment al­ready warned that some ODI ac­tiv­i­ties in non-real eco­nomic busi­ness could lead to ir­ra­tional in­vest­ments and il­le­gal ac­tiv­i­ties in ar­eas such as as­set trans­fers,” said Gao Peiy­ong, di­rec­tor of the In­sti­tute of Eco­nomics at the CASS.

Gao said the coun­try may in­tro­duce its first reg­u­la­tion of ODI, to bet­ter re­form the sec­tor and pre­vent po­ten­tial cases of ir­ra­tional in­vest­ment and money laun­der­ing, in the sec­ond half of this year.

China’s ODI in the non­fi­nan­cial sec­tors fell 45.8 per­cent year-on-year to $48.19 bil­lion in the first half of this year, data from the Min­istry of Com­merce showed.

“Grow­ing un­cer­tain­ties in global busi­ness set­tings, in­creased pru­dence by com­pa­nies mak­ing in­vest­ment de­ci­sions over­seas, and tight­ened com­pli­ance re­views by reg­u­la­tors on over­seas in­vest­ments are the rea­son for the drop,” said Gao Feng, a spokesman for the Min­istry of Com­merce.

He said China would con­tinue to sup­port qual­i­fied do­mes­tic com­pa­nies in­vest­ing abroad, es­pe­cially in­vest­ments in in­fra­struc­ture and man­u­fac­tur­ing projects re­lated to the Belt and Road Ini­tia­tive and in­ter­na­tional deals to boost in­dus­trial ca­pac­ity.

Gao Peiy­ong, di­rec­tor of the In­sti­tute of Eco­nomics at the Chi­nese Academy of So­cial Sciences

CLAUDIO VILLA / GETTY IMAGES

An In­ter Mi­lan player poses with a mas­cot of Sun­ing dur­ing a visit to the Chi­nese re­tail gi­ant’s head­quar­ters in Nan­jing, Jiangsu prov­ince, on July 19. Sun­ing bought a ma­jor­ity stake in the soc­cer club last year.

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